Macro Chapter 17 Institutions, Policies, and Cross- Country Differences in Income and Growth

2 Learning Goals 1) 1)Explain how economic freedom and growth are related 2) 2)Identify the benefits of economic freedom

How Large Are the Income Differences across Countries?

How Do Growth Rates Vary across Countries?

Why? 2 major reasons: 1)Institutions (see Chapter 16) 2)Economic Freedom

Economic Freedom as a Measure of Sound Institutions

Institutions, Policies, and Economic Performance

Economic Freedom Method of organizing economy with the following characteristics: 1)Personal choice 2)Market-based voluntary exchange 3)Competitive entry into markets 4)Private property

Main point: the government’s policies and involvement in the economy are important, but too much government intervention can harm growth

Major Conclusion: The more free the economy is, the higher the growth rate will be

The 2011 EFW report reveals the US is now in 10 th place with a rating of 7.60 “The world’s largest economy, the United States, has suffered one of the largest declines in economic freedom over the last 10 years, pushing it into tenth place. Much of this decline is a result of higher government spending and borrowing and lower scores for the legal structure and property rights components. Over the longer term, the summary chainlinked ratings of Venezuela, Zimbabwe, United States, and Malaysia fell by eight-tenths of a point or more between 1990 and 2009, causing their rankings to slip.”

Economic Freedom of the World EFW

Economic Freedom and Income Income per person in the freest quartile of countries was about eight times the figure for the least free. Least-Free Quartile Second Quartile Most-Free Quartile $3,802 $14,513 $32, GDP Per Capita, PPP (in constant 2005 dollars) Third Quartile $6,783

Economic Freedom and Growth Countries in the most free quartile grew at an annual rate of 2.4% compared to the 0.9% growth for the least-free quartile. Least-Free Quartile Second Quartile Most-Free Quartile 0.9% 2.3% 2.4% Growth of GDP Per Capita (Annual %) Third Quartile 2.1%

Economic Freedom and Life Expectancy People in the most economically free countries had almost 20 additional years of life compared to those in the least free economies of the world. Least-Free Quartile Second Quartile Most-Free Quartile Years of Life Expectancy (at birth) 2007 Third Quartile 66.7

The infant mortality rate in the least economically free countries was nearly 12 times greater than that of the most free economies. Economic Freedom and Infant Mortality Rate Least-Free Quartile Second Quartile Most-Free Quartile Infant Mortality Rate (per 1000 live births) 2007 Third Quartile 39.1

Access to sanitary water increased with economic freedom. Economic Freedom and Access to Sanitary Water 16.A3 Table in word file Should fit in this space Least-Free Quartile Second Quartile Most-Free Quartile 74.2% 89.5% 99.2% Share of Population with Access to Improved Water Source, 2006 Third Quartile 83.5%

Studies have shown that the quality of the environment is strongly linked to income. Economic Freedom and Environmental Quality 16.A3 Table in word file Should fit in this space Least-Free Quartile Second Quartile Most-Free Quartile Environmental Performance Index (2007/2008) Third Quartile 71.6

In the nations of the top quartile, the average income of the poorest 10% was more than eight times that of the poorest 10% from countries in the bottom quartile. Economic Freedom Income of Lowest 10% of Earners 16.A3 Table in word file Should fit in this space Least-Free Quartile Second Quartile Most-Free Quartile $896 $3,269 $9,105 Average Income of Poorest 10%, 2007 Third Quartile $1,744

The incidence of political corruption was lower in the more free economies of the world. These numbers are a reflection of the higher quality legal systems of the freer economies. Economic Freedom and Political Corruption 16.A3 Table in word file Should fit in this space Least-Free Quartile Second Quartile Most-Free Quartile Corruption Perceptions Index, 2007 Third Quartile 3. 2

With few exceptions, when an economy is more free the country will achieve: A higher growth rate A more equal distribution of income Better environmental quality Better health outcomes Higher standards of living